Monthly Archives: January 2011

Sorry I’m late on this one, but for those who haven’t seen it, well worth paying for. This is the taster from Foreign Affairs.

Good news about energy is rare. Energy use and its cost are rising worldwide, most countries remain dependent on oil imports, and little progress has been made toward curbing climate change. So the world should take notice of the recent dramatic increase in estimates of unconventional sources of natural gas in North America and elsewhere, perhaps the greatest shift in energy-reserve estimates in the last half century. In the past few years, thanks to technological advances, vast amounts of natural gas — particularly gas trapped in underground shale basins — have become economically viable.

This development is an unmitigated boon for consumers interested in affordable energy, environmentalists looking for energy sources that emit less carbon dioxide than either oil or coal, and governments that hope to reduce the political and market power of today’s major oil- and gas-producing countries. The prospects for a greatly increased global supply of natural gas have dramatic implications for both international energy markets and the energy policies of individual nations. Over time, natural gas use will expand into the power sector and may then displace oil in the transportation and chemical sectors. As more natural gas becomes available and more of it is traded, the regional gas markets that exist today may well merge into a more integrated and open international gas market with a single price.

Countries that import natural gas should anticipate more competing sources of it, which will lower prices and reduce concerns about the security of the gas supply. No longer, it seems, will the world be dependent on a few nations — Iran, Qatar, Russia, Saudi Arabia, and Turkmenistan — that control the bulk of conventional natural gas reserves. Countries that produce natural gas will need to adjust to lower revenues from natural gas exports; for some of them, the adjustment may be quite severe and potentially destabilizing. As gas acts as a substitute for oil, demand for oil will fall, putting downward pressure on oil prices. This will lessen, but certainly not eliminate, the geopolitical influence that major oil-exporting countries enjoy today. It is perhaps a permissible exaggeration to claim a natural gas revolution. But like all revolutions, whether and to what extent the benefits are realized will depend on how rapidly the economic and political systems adapt to the change.

Foreign Affairs is an example of what I mean when I say that the shale gas is a story too important to be left to the “energy experts”. It’s also what I mean by saying shale gas is much more important than that it changes everything. Here in the UK, we don’t need Chris Huhne, or far worse, Ofgem, to tell us that gas is insecure, or volatile, or years away or bad for the water so let’s forget about tens of billions of pound of tax income just to be safe.

What we need is an informed view from political and economic actors outside of the narrow enery sphere who don’t like to be contradicted and mostly wish shale would just go away. We need Cameron and Hague and Osborne from the UK to get involved and start telling us why we should or should not embrace gas. The entire UK political system needs to adapt to this change. To the true Englishman as Jeremy Paxman noted, any change at all is a change for the worse. But the coalition is a change, too early to say for what, but it does signify that change can be quick. One day someone in the UK government will wake up and realise that shale can transform the entire economic and political system and help the government meet not only climate but overall economic, and thus political, goals

The documentary Gasland has attracted wide attention. Among other things, it alleges that the hydraulic fracturing of oil and gas wells has contaminated nearby water wells with methane in a number of states including Colorado. Because an informed public debate on hydraulic fracturing depends on accurate information, the Colorado Oil and Gas Conservation Commission (COGCC) would like to correct several errors in the film’s portrayal of the Colorado incidents.

Dominion Resources Inc., the owner of Virginia’s largest utility, is considering exporting natural gas from its Cove Point terminal in Maryland.

Dominion is working with a Cove Point partner on plans that would allow the facility to send gas from the Marcellus Shale overseas, Chief Executive Officer Thomas Farrell said today during an investor conference call. Statoil ASA, Royal Dutch Shell Plc and BP Plc are partners in the liquefied natural-gas terminal, currently only capable of receiving fuel shipments and sending it into U.S. pipelines.

One doesn’t have to be Sherlock Holmes to figure out who the partner would be. Statoil were one of the first non-US investors in shale way back in November 2008 via their JV with Chesapeake in the Marcellus. But even then Statoil saw that the potential for the Marcellus was massive. And even better, Statoil had an existing interest in Cove Point as an import terminal. That interest wasn’t worth anything anymore and was sure to have been written off long ago. The fact that Statoil could bring back an investment from the dead was icing on the cake.

Even better is the back story of the Cove Point facility. It was built in the 1970’s to import Algerian LNG, which never came to pass. What then happened is the conversion of the site into a storage facility. Pipeline gas was converted to LNG, and sent out in times of high demand. So, the most expensive part of conversion has already been done: Cove Point has existing liquefaction capability. That and the fact that Statoil have an interest always made this one something that Statoil, in their poker faced Norwegian fashion probably tried to hide from the poker faced Oklahoma oil field people on the CHK side. But no matter, everyone’s a winner in the end here.

So when might this happen?

“If the Marcellus is going to build out the way it is expected, to reach its full potential, people are going to have to explore exportation of the gas,” Farrell said.

Dominion won’t expand the terminal near Baltimore without firm contracts “for a long period of time” from both suppliers and customers, Farrell said. The company, based in Richmond, Virginia, has talked to “a number of very major companies” about the project, he said.

The only logical alternative is world markets, where NBP winter 2010 is already trading at well over $7MMBTU. Even $5 is a substantial improvement for both European consumers and North American producers. Last years $4 gas went to below $3. It will go there again. But exports can provide a bounce back. Stuck in the middle will be European consumers between the mammoth Qatar volumes coming to market this winter and at a minimum North American re-exports of recycled Trinidad, Peru and Nigeria cargoes that get parked at US LNG terminals. And if Qatar is worried about that, it’s clear that if the Gulf Coast can export, then virtual and subsequent physical exports straight from the Marcellus to the world via Cove Point LNG in Baltimore will prove that shale gas will change the world.

Back in early November there were two conflicting stories from different parts of the dominant UK gas company, Centrica plc, owner of the British Gas brand

Centrica put up domestic gas and power prices at the start of the winter based on future forward prices. According to the old Centrica spin, swallowed in it’s entirety by UK regulator Ofgem, UK gas prices were set one to three years in advance.

I say that the Plan B for UK energy should be a substantial short term reduction in carbon at low to no cost by 2030, primarily by replacing coal with gas for generation. I think that including demand reduction, efficiency and gas for transport we can get pretty close to 50% reduction by 2030 affordably and realistically.

If Cheniere can obtain the necessary regulatory approval and financing, Mr. Souki says he can start exporting gas as early as 2015. He predicts he will eventually be able to export two billion cubic feet of liquefied natural gas a day from his facility, or about 3 percent of current domestic gas production. As other companies like Freeport LNG join Cheniere in exporting liquefied natural gas, Mr. Souki says the United States has the potential to become a premier global provider, capable of exporting 10 billion cubic feet a day, roughly the amount that Britain consumes.

That’s 283 million cubic metres, which is actually equal on an annualised basis to 103 BCM.

How big a number is that: sit down if you’re an LNG trader. The entire European (including Turkey) imports of LNG in 2009 was just under 70 BCM.

Cheniere of course is just ONE US terminal. There are others such as Cameron and Freeport also asking for export licenses. Kitimat in British Columbia is exporting to Asia from 2014. 10 BCF sounds too high, but based on his initial plans for 2.5 BCF from last year and throwing in other terminals, it’s not completely out of the window either.

People say I’m crazy when I point out the obvious export potential of Cove Point Maryland or how if sufficient gas is found in New Brunswick that the Canaport facility in Saint John would be hugely profitable.

As a certain well known shale gas gentleman says:

You have to have self-confidence to be out there alone when most people say you are wrong,” said Aubrey K. McClendon, chief executive of the Chesapeake Energy Corporation, the second-biggest domestic gas producer, who has pledged large shipments for Cheniere to export. “He’s going to be successful and it’s going to be great news for the U.S.”

I don’t believe this entire story though:

The central assumption behind the export strategy is simple: American gas prices are destined to be cheaper than European and Asian prices for years to come. At today’s prices, companies would be able to buy American gas at $4.35 per million British thermal units, and then sell the same gas in Europe or Asia for roughly double that price, since long-term contracts globally are still largely tied to high benchmark oil prices.

To take a gamble that high oil prices will, if they continue at all, at least continue to competete against gas is the hole in the strategy here.

Skeptics predict that the current gas glut in the United States will spread around the world as shale is drilled in Europe and Asia, major producers like Russia increase exports and more L.N.G. export terminals are built in the United States.

“For heaven’s sake, Israel just discovered 16 trillion feet of gas,” said Mr. Gheit. “Indonesia, Qatar, Algeria, Nigeria and now Israel can all sell cheaper than the U.S.”

But that doesn’t really matter, because the issue here is not gas. It’s oil. Europeans are still getting their heads around the idea that gas isn’t running out. But in Texas the issue is how to get rid of it, and a lot of that is down to the potential success of the Eagle Ford and Haynesville shales close to the Gulf Coast.

The Eagle Ford is oil rich, but gas sits in the way. No gas = no oil. Oil = $70 a barrel (it will be that)? It still makes sense to give the gas away. It will cost money to keep gas in the ground. Exporting will also push US gas up slightly as well, although prices are in such a downward spiral that it will help the industry, not hurt it. But who knows what the future may bring:

But even Mr. Souki admitted that the economics and global politics that underpin the spread between oil and gas prices were too unpredictable for him to pronounce complete confidence in his new plan.

The other day, as he stood in the terminal control room here watching operators working on a bank of computer monitors, he recalled that “I was convinced we would use this facility at full capacity.”

“History has demonstrated that, with all the facts in, in two years I could be totally wrong,” he said.

Ignored for some reason in the English language press, big news from France’s business paper Les Echos refers to this document in English from Total seeking out 50% partners for a big shale find in South Central France near Montelimar.

Total is planning to farm‐out up to 50% interest in their 100% operated South East Basin, Montelimar Permit acreage in the south east of France.Total is seeking qualified partners to join them in evaluating this large & very significant shale gas opportunity that could hold up to 85 TCF of IGIP, in return for a carry on the exploration period work program.

The permit area covers 4327 sq km (> 1 million acres) and spans nearly the entire geographic extent of the play area. Total is also in the process of acquiring an additional 1850 sq km to cover the remaining extension of the play to the north.

This is not a small discovery. Total was active in the area with Devon Energy who almost wrote the book on US shale, but who decided for some reason to go back home. Why? This discovery is huge?

And how huge is huge?

The exploration for unconventional plays & particularly shale gas plays in Europe has progressed rapidly following the success of shale gas plays in North America. Total believes that it has identified a high potential shale gas play in SE France; the Liassic Shale Gas Play in the South East Basin.Total determines that the Gas Shale resource could be up to IGIP of 85 TCF.The South East Basin Liassic shale gas play is directly comparable to the Posidonia, Liassic shale play of SW Germany & also has strong similarities to the North American Fayetteville & Woodford Shale Gas Plays.

The proximity of major gas infrastructure that has access to the French & European gas Markets (gas pipeline traverses northeast part of the permit), will enable rapid development & easy monetization of a successful gas shale project. Natural gas demand in France is currently ~45 Bcm/year (4.3 bcfd). The majority of French domestic supply is imported; a low cost onshore domestic gas source with attractive fiscal terms would be very competitive. The fiscal terms in France are amongst the most attractive in the entire world, with a total tax take of ~35%.

Today, we do not know if it is technically and economically exploitable. And then, and it is not the least important aspect, this must be socially acceptable.

Let’s think about this. The gas has a rough value at today’s price of 20 euro cents per cubic metre which means an annual cost of 8.8 billion euros can be subtracted from the French balance of payments. Then, apart from any associated jobs, France would collect over 3 billion euros per year in corporation tax.

Turning that down sounds far more socially unacceptable to me, especially since in this part of France people already are drinking so much Perrier that they may not even notice methane in the water!

This field alone can be a game changer for Total, for France and for Europe. But because it’s not in the WSJ or the FT it doesn’t matter? Bizarre. If they don’t want the story, as luck would have it I’m in France next week anyway.

Maybe the Anglo Saxon press believe their own rubbish about Brussels so much that as well as missing the Total story today, they’ve passed on this story from Deutsche Press Agentur via Monsters and Critics

Brussels – Next week’s European Union summit is set to call for an analysis of shale gas as a potentially revolutionary domestic energy source, according to internal papers.The EU is heavily dependent on foreign suppliers, especially Russia, for its natural gas supplies, and is keen to reduce that reliance. Shale gas, from underground rock deposits, has already been hailed in the United States as a major new energy source.Now ‘in order to further enhance its security of supply, Europe’s potential for sustainable extraction and use of conventional and unconventional (shale gas and oil shale) fossil fuel resources should be assessed,’ reads a draft statement prepared by top EU officials for the February 4 summit and seen by the German Press Agency dpa.

At the financial blog Seeking Alpha, Vinod Dar has been consistently ahead of the game on shale oil. So after Bakken and the Eagle Ford what’s next?

The Eagle Ford and the Granite Wash may no longer be the singular cases that people outside the Texas oil and gas fraternity have maintained, in trying to diminish the strategic importance of such shale, tight gas and similar low permeability, large resource plays. And not just for the U.S. E&P business, but for global oil and gas production.

Who are the people he refers to? We’ve seen green,Gazprom, nuclear and coal unite against shale gas. I think we can start addng oil price bulls as new detractors, diminishers and denialists of shale oil. Remember, we can’t make people understand something if their job depends on them not understanding it.

Dar thinks the next big thing is also going to be in reviving Texas shales. One would think that after 100 years, Texas would have been pretty well dried out.Not so The best may even yet to come if the Eagle Ford guys are to be believed but there’s even more:

In Texas, Louisiana, Arkansas, New Mexico, Oklahoma, Pennsylvania, Michigan at least (and even in parts of Southern California and Europe)) the old is new again. Mature provinces are frontier plays.

If the Eagle Ford is like a sash across the breast of Texas from Louisiana to Mexico, so too is the emerging Wolfcamp like a medallion across West Texas (over 30 counties) and Lea and Eddy counties across the state line in New Mexico.

All very interesting says the European conventional wisdom, but this is some place far away of which we know nothing, and prefer that no one else hears about it either. These CW energy thinkers tell high priced clients that shale gas in Europe is 10 years or more away. But the reality is energy doers see things differently.

These days, the time line from discovering a promising liquids-rich shale play to commercial production has become astonishingly compressed. Independents know that first entry to accumulate a low cost position, rapid response to the specific characteristics of the play, and continual technological innovation are their competitive advantages. Where the pioneering independent goes today, the very large independents will quickly follow and then, with their tremendous talent, engineering, service company and capital resources, the mini majors and majors will arrive. Foreign E&P capital will also be eager to participate to capture both experience and returns.From emergent to core in two years is the new model.

The conventional wisdom constantly mentions in Europe a lack of a service sector as something that will prevent shale seeing quick returns. Hundreds of service providers already on the ground in Europe, or able to arrive next month beg to disagree.

The barriers in Europe aren’t physical, financial or political: They are mental.